Moody's upgrades India's sovereign rating, boosts sentiments (Lead)

New Delhi, Nov 17 (IANS) In a major boost to economy and investor sentiments, US credit rating agency Moody’s on Friday upgraded India’s sovereign rating to Baa2 from its lowest investment grade of Baa after 14 long years, a development Finance Minister Arun Jaitley said was “an extremely encouraging” global recognition of the structural reforms in the last three years.

Maintaining that the upgrading was based on New Delhi’s “wide-ranging programme of economic and institutional reforms”, Moody’s simultaneously changed the outlook for the country’s rating to stable from positive and upgraded India’s local and foreign currency issuer rating to Baa2 from Baa3.

“The decision to upgrade the ratings is underpinned by Moody’s expectation that continued progress on economic and institutional reforms will, over time, enhance India’s high growth potential and its large and stable financing base for government debt, and will likely contribute to a gradual decline in the general government debt burden over the medium term,” a Moody’s Investor Service release said.

“Moody’s believes that the reforms put in place have reduced the risk of a sharp increase in debt, even in potential downside scenarios.”

The revision of the sovereign rating of India a notch above investment grade also lifted key Indian equity indices to their new intra-day record highs. The two indices — S&P BSE Sensex and NSE Nifty50 — gained over 300 points each.

“Those (reforms) implemented to date will advance the government’s objective of improving the business climate, enhancing productivity, stimulating foreign and domestic investment and ultimately fostering strong and sustainable growth,” the agency said.

Moody’s lowered India’s growth projection for the current fiscal because of the impact of demonetisation and the Goods and Services Tax (GST).

“Reforms such as the GST and demonetisation have undermined growth over the near term,” the agency said, adding that it expects real GDP growth to moderate to 6.7 per cent in the fiscal year ending in March 2018.

However, as disruption fades, assisted by recent government measures to support small industries and exporters on GST, real GDP growth will rise to 7.5 per cent next year, with similarly robust levels of growth from fiscal 2019.

According to Moody’s, though the high Indian debt burden remains a constraint on the country’s credit profile, its longer term growth potential is significantly higher than most other Baa-rated sovereigns.

Reacting to the upgrade, Jaitley told reporters: “It is a belated recognition of all the positive steps taken in the last few years. It is a recognition and an endorsement of the process that India has undergone in the last three-four years where a number of structural reforms have placed India on a higher growth trajectory.”

He said the government had shown fiscal prudence through a series of steps in the last few years like demonetisation, introduction of Aadhaar, Insolvency and Bankruptcy Code, recapitalization of public sector banks and smooth transition to the GST that have led to better economic situation.

Jaitely said: “Smooth transition of GST is universally recognised as a landmark reform in Indian tax structure. All these steps which constituted major reforms are directional in nature. All steps taken in the last few years had a roadmap.

“It is extremely encouraging that there is an international recognition… This is not something that is happening in isolation.

“For three years we were doing a lot of structural reforms. Even we have moved up 30 places in World Bank’s Ease of Doing Business. Now after a long spell of 13 years, India gets rating upgradation,” the minister added.

The minister said that with the introduction of GST, market barriers had been removed. Also, demonetization had made the country less cash currency oriented and made it more digitised.

“Our track record for the last three years speaks for itself and we intend to move on that. We will maintain fiscal prudence,” Jaitley added.

Chief Economic Adviser Arvind Subramanian, who was at the press meet, said the ratings upgrade was a welcome collateral for government actions.